Tariffs in Transition: The Impacts of Trade on Credit Markets - Part 1

In today’s dynamic economic landscape, understanding the nuances and impacts of market segmentation, market volatility, and investment uncertainty is essential for developing targeted strategies to successfully navigate the intricacies of global trade. At S&P Global, the Credit Conditions Committee (CCC) plays a pivotal role in evaluating trends that affect economies, industries, and credit markets. As of the first quarter of 2025, North America faces significant interconnected risks stemming from the implemented tariffs, escalating geopolitical tensions, and rising interest rates. The uncertainty surrounding the duration and reciprocal measures from trading partners complicates the credit quality landscape, prompting the CCC to continuously monitor these developments and provide timely insights for organizations navigating the evolving trade environment.

The macroeconomic outlook indicates rising inflation pressures, with the Federal Reserve potentially halting its easing bias. The impact on GDP is expected to be negative, with estimates suggesting a loss of 30 to 40 basis points in growth for the U.S., while Canada and Mexico may experience even more significant declines due to their higher export dependency on the U.S. economy. Rising unemployment and inflation rates are anticipated across all economies as consumer demand decreases with higher prices and reduced purchasing power. Current effective tariffs include a 10% tariff on imports from Canada and Mexico and an approximate 35% tariff on imports from China. In the non-financial corporates sector, the impact of tariffs is generally negative as these tariffs are projected to increase costs across various sectors, particularly in the auto industry, where prices could surge by $1,500 per vehicle. However, some subsectors, such as chemicals and metals, may benefit. The current tariffs appear to be utilized as negotiation tools for concessions in other areas, including immigration and defense spending.

Additionally, the implications of tax policies and labor market dynamics are significant. With an impending expiration of tax provisions estimated to impact around $4 trillion over the next decade, the administration faces the challenge of balancing potential tax cuts with revenue generation. The Tax Cuts and Jobs Act (TCJA) tax cuts, which have primarily benefited higher-income households, are under scrutiny as consumer spending increasingly concentrates among the wealthiest 10%. This concentration poses risks to overall economic stability, especially as inflation pressures mount. Looking ahead, the long-term economic outlook presents a mix of challenges and opportunities. Current labor market dynamics indicate that without a steady influx of skilled workers, wage pressures are likely to intensify. As businesses navigate these uncertainties, the potential for technological advancements and capital investments could serve as a catalyst for growth. By leveraging these opportunities and addressing inherent risks, stakeholders can better position themselves for success in an increasingly unpredictable economic environment.